MIDAS SHARE TIPS: Travis Perkins is primed for house market upswing

In 2007, more than 1.6 million homes were sold in Britain. Two years later the figure had fallen to fewer than 850,000 and it has hovered around that level ever since, with just 869,000 sales recorded in 2012.

The rapid and prolonged decline has been disastrous for builders and contractors and should have been equally dreadful for builders’ merchant Travis Perkins – but it has not.

The company has used the recession to acquire rival operators and increase market share to become the country’s largest supplier of building materials, with 2,000 stores and 16 brands, including Wickes and Tile Giant, as well as Travis Perkins itself.

Shed loads: The firm aims to expand to 3,000 outlets in the next few years

The shares have started the year well but at 1218p, they have real long-term potential and should gain ground as the economy begins slowly to recover and consumers become more optimistic.

An Englishman’s home is said to be his castle. In other words, people take pride in their homes and view them as their personal fiefdoms.

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However, they are particularly keen to make their property look its sparkling best when they are about to sell it or have just moved somewhere new.

Over many years, therefore, the biggest influence on construction activity has been the scale of property transactions. These have begun to increase.

Although the absolute number of moves was subdued last year, activity picked up in the second half and is expected to continue to do so in 2013 as the Government’s Funding for Lending scheme kicks in, encouraging banks to lend more money.

Mortgage approvals in November (the latest month for which statistics are available) reached 54,036, the highest November figure since 2009 and high street banks are becoming more competitive with their mortgage products.

Recovery is expected to be gradual, but it should deliver material benefits to Travis Perkins, particularly in the second half of the year, when people’s incomes are forecast to begin rising again.

Once the property market becomes more active, renovation work should increase quite sharply. In a survey of 1,000 homeowners carried out in the autumn by stockbroker Liberum Capital, more than 650 people said their homes needed redecoration or repair, so they will probably get cracking pretty quickly once confidence improves.

In the meantime, Travis Perkins has been positioning itself to best advantage. In 2010, it bought plumbing and heating merchant BSS in a £558million cash and share deal, and a year ago it acquired the remaining 70 per cent of fast-growing hardware retailer Toolstation, having bought 30 per cent of the group in 2008.

These deals and other, smaller, transactions have catapulted Travis Perkins to its current, market-leading position and ambitious chief executive Geoff Cooper is keen to expand the business still further.

Over the next few years, he hopes to take the group to 3,000 stores and increase its burgeoning online business.

Most building materials are bought in shops, but online transactions are growing rapidly and Travis Perkins has been upgrading what it offers on the internet to ensure it keeps pace with customer demand.

Cooper has even dipped a toe into the Continent via five Toolstation branches in the Netherlands. Overseas expansion will be measured, but might prove a valuable addition to the group in time.

Back at home, Travis is taking on a new finance director this spring. He is Tony Buffin, a 41-year-old Briton who has spent the past three years in Australia, working as finance director at supermarket giant Coles.

As part of a tight-knit management team, Buffin helped increase Coles’ underlying profits by 63 per cent between 2009 and 2012 and should boost results at Travis too. Brokers expect profits to rise from £263million in 2011 to £310million in the year just ended and £335million for the current year.

The dividend is also forecast to show good progress, increasing from 20p in 2011 to 24p for 2012 and 29p for 2013.

Midas verdict: Travis Perkins prides itself on having the right products on the shelves in sufficient quantities that builders can find what they need when they need it. Staff are trained to offer useful advice and tend to stay with the group for longer than most shop attendants.
The company also benefits from its size as this means it can secure the best deals with suppliers. Cooper is a focused and determined leader and the shares should deliver value over three to five years. Buy.